Budgeting is one of those things you know you should do, but really really don’t want to – you’re not alone, we’ve all put off creating a budget. We’re here to pay forward the fact that it’s never too early and you can never be too honest with yourself in building your budget.
Before we get to the nitty gritty, let’s start with the basics: a budget is a financial tool to ensure that you’re not spending more money than you have. There are TONS of tools and many methods to follow, but Team Realworld is pro-50/30/20 Rule. It’s logical, basic, and the math is easy.
Before we get to the math, you need somewhere to start – that number is your take-home income. It’s easiest to do this on a monthly basis, and since most people get paid 2x a month, take your most recent paycheck and multiply that number by two.
For example, if your paycheck was for $1000, that means you have $2000 each month to budget.
50% of that monthly income goes to needs. We’re going to break that down a little further – no more than 30% of your total income should go to rent, so that leaves 20% for all the other necessities, things like transportation, utilities, groceries, and any additional payments you expect each month (student loan repayments, car loans, renters insurance, health insurance, life insurance etc.) Note, if your health insurance comes out of your paycheck, you’ve already included that as a deduction to your take-home income, so no need to count it again.
To continue the math, if your monthly income is $2000 that means spending less than $600 on rent and around $1000 total on needs.
Next up – wants! These are the fun purchases like shopping, dining out, entertainment, and other hobbies, the things you actually want to spend your money on now that you’re earning an income. 30% of your take-home income can be attributed to these expenditures and they’re the most tempting to let take over your budget.
In our hypothetical situation, you have $600 to spend on wants each month.
And finally we have 20% for savings, the long-game of the budgeting playbook. This savings can include putting money away for a big purchase, unexpected expenses, or for IRA contributions or other long-term investments. PSA if you have an employer-sponsored retirement plan with automatic contributions, that money may have come out of your paycheck pre-paycheck, just like health insurance! Though saving for the future can be hard to prioritize, you’ll be surprised how easy (and rewarding) it can be if it’s done automatically. You can assign 20% of your paycheck to a savings account to make it as seamless as possible!
20% of your $2000 monthly income is $400 – let’s stick to the savings goal!
Budgeting doesn’t have to be overwhelming or boring, but it is important to be honest with yourself in the process – no use in skipping over expenses (think those $20 Ubers you tend to take home on the weekends or your morning $4 Starbucks habit) to make yourself feel better! This is YOUR budget after all, and while there’s no need to share the deets with the class, we’d love to know…
What budgeting tools you use and what works best for you?! Share your thoughts in our community forum here.